Academic journal article Journal of Risk and Insurance

Liquidity, Estate Liquidation, Charitable Motives, and Life Insurance Demand by Retired Singles

Academic journal article Journal of Risk and Insurance

Liquidity, Estate Liquidation, Charitable Motives, and Life Insurance Demand by Retired Singles

Article excerpt


In this article, a model of life insurance holding is formulated. It takes into account the liquidation values and liquidity of estate assets and the ability of life insurance death benefits to bypass the probate process. Tobit regressions based on the model are run using the U.S. Survey of Consumer Finances 1989 data set. The results showed net worth (fixing net liquid assets and annuity wealth) and annuity wealth (fixing net liquid assets and net worth) to be positively related to life insurance holding. Moreover, net liquid asset holding (fixing net worth and annuity wealth) and charitable motives also affect life insurance holding.


The U.S. Survey of Consumer Finances (SCF) 1989 data set shows that about 47 percent of the singles age 65 or older have life insurance coverage with an average life insurance holding of $10,959 and a standard deviation of $69,480. The average term value of life insurance holdings is $23,268. [1] The figures for the single and the married white males in the sample are $101,925 and $150,971, respectively. The average for the subjects with net worth below $1 million equals $4,231 for term value and $9,059 for life insurance holders. Although the last figures are significantly smaller than those of the entire sample, these figures are certainly not negligible. Therefore, the presence of life insurance in retired singles' portfolios deserves an explanation.

Economists have proposed several reasons for holding life insurance. Yaari (1965) recognizes that life insurance is a financial instrument for allocating resources under lifetime uncertainty. Campbell (1980) suggests that life insurance can be used to insure against the loss of family income upon a wage earner's death. Bernheim (1991) argues that life insurance is used to counteract the forced savings in annuity wealth due to excessive social security taxes. The usefulness of these explanations for the case of retired singles is doubtful. First, a retired individual does not need to insure against any future wage loss due to early death. Second, no one in this age group in the SCF data set has children under 18; it is unlikely that the subjects have immediate needs for supporting their children or have particularly strong altruistic bequest motives.

One conjecture is that since bequest motives might be weak for this age group, life insurance is held mainly for paying immediate costs of death, such as funeral expenses. [2] However, an average net liquid conventional asset holding (excluding stocks) of $81,660 by a holder in this age group should allow an average subject to pay his or her costs of death. Therefore, extra cash from life insurance death benefits seems unnecessary unless the holder plans to bequeath. [3] Perhaps nonaltruistic bequest motives towards children (see, e.g., Cox, 1987, and Bernheim et al., 1985) remain strong when altruistic bequest motives weaken as the children become financially independent. Another possibility is that the bequest motives towards others such as charities and relatives remain strong as a single person ages. The latter explanation is quite plausible, as Barthold and Plotnick (1984) find that charitable bequests and bequests towards children and spouses may be substitutes for each other.

Two problems remain even if a retired single has bequest motives. First, the presence of bequest motives does not guarantee that the individual gives bequests instead of inter vivo transfers. Second, even when the individual decides to give bequests, he or she may choose liquid or nonliquid assets other than life insurance death benefits as a bequest medium because of the actuarial unfairness of life insurance as a result of imperfect competition, high commissions to agents, and adverse selection.

Berhnheim et al. (1985) provide a plausible answer to the first problem. They develop a model of strategic bequests in which a testator influences the decisions of the beneficiaries by holding wealth in bequeathable forms and by conditioning the division of bequests on the beneficiaries' actions. …

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